In the latest edition of The New England Journal of Medicine, its editor, Dr. Marcia Angell, poses the question The Pharmaceutical IndustryTo Whom Is It Accountable? In her attack on the American pharmaceutical industry, she calls for various reforms, including an independent national advisory panel to study the industry and decide whether some form of price controls are desirable. There were several puzzling and disconcerting aspects of this editorial.
For starters, the editorial was published in a major scientific journal and written by the editor of that journal. Yet of the 20 cited references, 15 were from the popular press; only three were from refereed professional journals. There is a scientific literature on the pharmaceutical industry, and I would have expected the editor of the New England Journal to consult that literature. For example, Professor Patricia Danzon of the University of Pennsylvania has written several articles criticizing some of the international pricing data that Dr. Angell cites.
In addition, the editorial criticizes the industry for excess spending on promotion. This is a topic about which I have written several articles, including one in the New England Journal. I always find criticisms of spending on promotion and comparisons with research spending puzzling. In an important sense, both research spending and spending on promotion are informational spending. Research obtains information about the properties of a chemical. Promotion then informs relevant parties (physicians and patients) of these properties. Which of these is larger for a given company in a given year is an issue of little interest from the perspective of efficient resource allocation. In a market economy promotion and advertising are the way in which sellers inform potential buyers about their wares, and Dr. Angell does not explain why this industry should be treated differently than any other, nor does she suggest any other way of providing information about drugs.
Another issue that is given much attention is the issue of me too drugsdrugs which are minor variants of established products. First, these minor variants often have reduced side effects or more convenient dosing properties, so that patients are more likely to utilize the drugs. But second, in an article largely concerned with drug pricing, it should be noted that the major price competition for patented drugs is in fact from exactly the me-too drugs that Dr. Angell criticizes. Aside from the study commission, the only concrete recommendation Dr. Angell makes is for Requiring manufacturers to demonstrate that a new drug is substantially better than anything available .... This would be a sure way to extend the value of existing patents by creating what economists call a barrier to entry and would allow manufacturers to charge much higher prices.
Dr. Angell claims that the industry is enjoys extraordinary government protections and subsidies. But in fact the benefits are not in any sense extraordinary. One of the alleged benefits are large tax breaks because its research and promotional costs are tax deductible. But these are not unusual tax breaks; all industries can deduct these costs. There is no reason for treating the pharmaceutical industry differently from any other industry. Her proposal that some small fraction of the industrys revenue should be set aside for social purposes is exactly a proposal to differentially tax this industry. If society decides that these social purposes deserve public funding, then normal tax revenues should be used. There is no reason to single out one industry to tax.
Another alleged subsidy is the patent protection given to new drugs. Again, inventors of anything (subject to certain regulations) enjoy 17 year government-granted monopolies on their inventions, and it is universally agreed that such protection is needed to create incentives for research. To deny the pharmaceutical industry this protection would be to treat them worse than any other industry.
The industry is profitable. But one must ask whywhy have investors not invested more in the industry, to drive the profits down to lower levels? The answer is risk. This is not the risk involved in R&D, although the outcome of any one research project is uncertain. Rather the real risk is that of massive government intervention in the industry. Polemics such as that of Dr. Angell fuel this risk and therefore lead to the increased prices that she decries.
We must face the facts: Anything that reduces earnings from pharmaceuticals will reduce incentives for R&D and therefore will reduce the number of new medicines available in the future. As a society we could decide that we are willing to accept this tradeoff, although I do not believe that we should or would. But claiming that price controls would not stifle innovation and frighten investors, as does Dr. Angell, is to put the argument in never-never land.
Dr. Angell is a distinguished physician. When I am sick I consult a physician. When Dr. Angell wants economic analysis, she should consult an economist.
|Paul H. Rubin is a Research Fellow at the Independent Institute, the Samuel Candler Dobbs Professor of Economics at Emory University, and a contributing author to the book American Health Care: Government, Market Processes, and the Public Interest (Independent Institute).|